It’s everybody’s favorite topic in the personal finance world, budgets! It’s a necessary topic that should be on your radar all the time (or at least when you’re looking at your monthly finances). It can help you relax about money if you know exactly just how much you are spending or earning.
Steps for your budget
Before I get into the contents you should have for your budget, it’s equally valuable to know how you will create the it and what you can do after, which I detail below.
The first step, write it down. This is where the magic starts. Without knowledge of where your money is going, your money will get lost and end up in someone else’s wallet (gasp!). A person who just says “I know roughly how much is going out and how much I’m bringing in, I’ll be fine for this month” is putting him or herself up for failure.
Without knowing the exact number, you cannot practice discipline because every purchase might just as well be “I think I can afford this additional soda”. What’s the best place to write down your expenses? My personal favorite is excel but a good old pencil and paper will do just as well.
If you’re not used to budgeting, it will be hard to practice budgeting as a habit. This is completely OK. Maybe you budget once a half-year, quarter, or a month because you’re not used to pressing that excel spreadsheet on your computer.
What matters is starting to get used to budgeting as a habit. Maybe for every day in one week, all you do is get used to pressing that spreadsheet on your desktop. The next week, you get used to looking at it. Third week, you just update one cell. So on, and so on.
The second step, practice discipline. Congratulations! You’ve written down your budget and have precise knowledge of the number that you will spend on groceries this week, food, or going out. The next step is implementing it.
Before you update your numbers, you should compare whether your projections matched your real-life numbers. If you beat it, congratulate yourself and challenge yourself to see if you can do it again next time. If not, figure out why you didn’t beat it and adjust for the next time, consciously thinking about your number.
Third step, update . You’ve reached the final step and now you’re an expert at understanding your budget! This final step is necessary because it will be nearly impossible to spend the exact amount of money next month as you did this month. You will have to be on your toes to adapt every month to the continual change in spending.
The actual categories
I’ve created a sample budget for my readers in Excel format available by clicking on the link. The expense categories are listed and you can plug and chug amounts that are specifically applicable to you. Adding in a “miscellaneous” category for all other expenses not included in the spreadsheet can also work.
A rule of thumb that I like to implement to check for sustainability is checking to see if my last 30 days income exceeds or is less than my last 30 days expense. If the difference is positive, then I am assured that I’m on the right path, if not, then it could use some work on improving.
The takeaway in using the rule of thumb is to make sure that my cash flow is positive every month. If my cash flow is not positive, then I have to skim through the spreadsheet to assure myself that it was only a one-time extra expense (trip to Vegas, anyone?).
If it’s not a one-time expense that caused you to have negative cash flow, it’s not time to panic, it’s time to improve. Consistently producing negative results will end in inevitable bankruptcy or taking on additional debt to raise cash for survival.
Improving it every month is a hard task. But it’s recommended to get that magnifying glass out to scrutinize where your money is going to solve the mystical world of finance.
Things to improve on:
I believe reducing these expenses are a priority. These expenses are things that you can cut out without lowering your ability to survive / eat / live.
- Entertainment. Cutting back on movies once in a while can help. Instead of going to the movie theater, anyone can pick up a low cost Netflix account for those fun family evenings. Concerts and travel also aren’t absolute needs. When I start working, I plan on taking zero vacations until at least I paid off my dues in the first year. After the first year, my default position will still be taking zero vacations until I see an absolute need to. Extreme? Maybe, but I am comfortable with it.
- Transportation. There’s no reason to buy the latest model! Transportation should be used to get you from one side of the city to another. There’s also good evidence that shows a car loses 50% of its value after the consumer starts driving it. I bought a $10,400 (after-tax) 2015 car with 40k miles on it and was the cheapest I could find online in my city for that model / mileage count.
- Food. Avoid eating out as much as possible. First, it’s expensive to purchase food from a dine-in place. Second, it’s healthier cooking food for yourself. You can control what goes into your food (salt, cheese, etc) and the portion. Learning a life skill that’s cheaper and healthier than the alternative? Sign me up!
Anything else that you can consciously control means that there’s room for improvement. If you can control your ability to build wealth, why not use that power to be wealthy? While happiness isn’t defined by how many dollars are in the bank, it sure is better to be rich than to be poor or mediocre!
I will be posting my money allocation after I start working. I will be providing full details on my mistakes and successes so keep in tune for updates!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
Read more about me here.